jcinsf

The U.S Is Not Japan

Have read many interesting takes on the Japan comparison to the current US economy--some for and some against. I can't say that I have my own head around it yet, but rather, I just look for ideas here and there that might show us the way (and, knock on wood, a profitable one) out of this mess. The best one I've come across (can't recall where) suggested that a key in Japan getting some, any, headway on their problem was complete transparency in the banking system. They did a kind of government audit of the banks and let everyone see what everyone was holding. Unknowns were removed. Questions answered. And afterward, money started moving again. It may not have solved their "deflationary" spiral but it certainly helped. I'm struck by how little government can do and do well, especially in a timely manner (the US is proving this again). But what they can do is establish a regulatory process to promote/demand transparency; and the sooner it gets implemented the better.

S&P 500 at 600: Is It Possible?

Theoretically, the S&P should be based on earnings, as well as a fair market multiple of those earnings (the PE ratio). The issues facing the market now are tied to a lack of visibility into the E side of the equation. Sure, PEs have crashed to earth. But has the E side made its move? Not yet. Hold on to your hats then because its entirely reasonable to expect earnings to retreat 20+% from 2008 to 2009. This serves up weaker earnings than the so-called Wall Street pros are forecasting. Got to go with the top downers (some calling for flat, some calling for 40% retreats) who have been looking at this earnings puzzle, those analysts not in the pockets of corporate management. I've read that these folks previously called for something like $65 in operating earnings on the S&P 500 for 2008; it stands to reason (based on PEs in the 10-15 range at market bottoms) that earnings will have to stay flat or slightly grow to warrant a S&P in the 800s. A more likely scenario would seem the retreat in earnings I mention above (20+%), perhaps more as the Financial Services sector is so heavily weighted in the S&P. Not only does this make 600 possible, but likely, especially absent the support of the 2002 lows previously breached in the current downturn. Personally, I'm waiting for the mid 600s to start time averaging covers of various shorts while pivoting into baskets of beaten down, well diversified long ETFs.

The Deflation Scam

All the stimlus and central bank action will only stabilize banks and not stop the runaway train that is deflation. We have a liquidity trap and not enough velocity to unleash the inflationary beast.

Consider commodities down over 60% across the board; over $7 trillion in wealth destruction; 25% of mortgages underwater and further real estate declines to come; and ton after ton of ugly debt still floating around the financial world (a must-play game of musical chairs with no one willing to get out of their seats).

Wait and see how the E in PE falls off the side of the table, folks. There will certainly be new lows in the markets in 2009.

Sniffing around the edges for some areas of pricing power is fool's gold. So is the talk of going long real gold itself. Sure, ever dog (and investment) has it's day, but gold's was in the past and likely someday, out there, in the future. But, here's the thing: drum roll please. When? What kind of time horizon works in your portfolio? Important question. Inflation will return, sure. But not for a good while and not until the excesses of over a decade get worked off.

Strong dollar, weak earnings, deferred expenditures, increased savings (enough to offset any government stimuli), and possibly devalued currencies. Deflation.